Socially responsible Investing - more than just cutting out the cigarettes and booze

There is a perception that socially responsible investing (SRI) generally yields lower returns with higher risk. However, this is not necessarily true, and depends on the nature of the underlying SRI strategy, says Frank Magwegwe, head of institutional marketing at Investment Solutions, South Africas leading multi manager.

"In one sense, SRI is like traditional investing. Socially concerned investors pursue the same economic goals as other investors: capital gains, higher income and/or preservation of capital for future needs," says Magwegwe. "However, they want their investments to support needed and life-supporting goods and services, and not anything that causes harm to the social or physical environment."

On the perception that SRI returns are lower and risk levels higher, Magwegwe cites examples of SRIs available in the South African market.

For instance, retirement funds can invest in pooled investment portfolios with investments in bonds issued by infrastructure providers such as the Development Bank of South Africa, TCTA (the Lesotho Highlands Water Project and the Berg Water Project), Eskom, Telkom, Transnet, Umgeni Water, Rand Water Board and Infrastructure Finance Corporation Limited (INCA).

"Infrastructure-bond portfolios have delivered returns more or less in line with typical bond portfolios at more or less the same level of risk," he says.

"For example, for the three years to April 2007, the Futuregrowth Infrastructure Bond Fund returned 13.45% and the Cadiz African Harvest Infrastructure Bond Fund 12.26%, against the BESA All Bond Indexs (ALBI) 12.01%.

"For the same period, the volatility of the ALBI was 4.78% against 4.84% for the Futuregrowth Infrastructure Bond Fund and 3.86% for the Cadiz African Harvest Infrastructure Bond Fund."

Retirement funds can also invest in pooled portfolios with investments in companies concerned with job creation, training and skills development, black economic empowerment, sound environmental practices and corporate governance.

"For example, for the three years to April 2007, the OMIGSA Community Growth Fund returned 41.45% against the FTSE/JSE All Share Indexs (ALSI) 43.31%. For the same period, the volatility of the ALSI was 17.31% against 11.93% for the OMIGSA Community Growth Fund."

Retirement funds can also invest in multi-manager portfolios that combine different investment vehicles available for SRI. For example, the Investment Solutions Sakhsizwe Portfolio that was launched in November 2004 is a balanced portfolio that optimally blends the skills and styles of three investment managers with different SRI portfolios. For the two years to April 2007, the Investment Solutions Sakhisizwe portfolio returned 20.81% against the composite benchmarks 16.72% (which is 70% ALBI, 20% SWIX and 10% SteFI Call). For the same period, the volatility of the portfolio was 416% against 4.42% for the benchmark.

Magwegwe says these examples show that without specifying the actual SRI vehicle, it cannot be concluded that returns are generally lower return and risk higher.

"Instead of relying on half truths, retirement fund trustees and other investors need to gain understanding of the different investment vehicles available for SRI to enable them to develop and adopt SRI policies consistent with their investment strategy."

He adds that there is also a misconception among trustees that SRI is inconsistent with the general retirement fund objective of maximising investment returns. This misconception, he says, is a result of trustees believing the sole objective of retirement fund investing is to maximise the savings pool at retirement age in absolute terms.

"In a country such as ours, which has a huge infrastructure backlog, one must also take into account the ability of retirement fund members to maintain their pre-retirement standard of living in the area in which they choose to retire.

"For many people in South Africa, retirement means spending their last years in rural areas where there is no running water, electricity, shopping malls, etc. In this case, the member might have a large savings pool but clearly the standard of living has dropped significantly."

Magwegwe encourages investors to look beyond common perceptions and analyse SRI investments. "It is possible to achieve excellent returns at lower risk while achieving SRI goals."